Factor exposures always seem to matter more on the drawdown days.
That’s a quote attributed to “every equities PM ever” by Nomura’s Charlie McElligott (quoth PMs, quoth Charlie), who is out with an afternoon blast on a day when US equities struggled mightily despite the trade rumor mill being cranked into overdrive.
Some might be inclined to call Monday’s palpable risk-off mood on Wall Street a manifestation of the market losing patience with the never-ending political discord inside the Beltway that is now manifesting itself in what certainly looks like the beginning of a long-shot impeachment push on the part of House Democrats.
Still others have suggested that market participants are getting a bit queasy at ongoing “presidential harassment” (to adopt and adapt one of Trump’s favorite phrases) of the Fed and, by extension, markets.
Finally, it could well be that everyone is by now exhausted with the recycling of what amounts to the same trade headline. We may well have squeezed all the blood we can squeeze from that stone (to quote a January note penned by McElligott).
But whatever the case, Charlie reminds you that “Value over Growth days tend to be associated with negative performance [and] Monday is yet another expression of this.”
Charlie talked exhaustively about this dynamic during October when a nauseating Momentum unwind and concurrent selloff in consensus Tech/Growth longs set the stage for what would ultimately morph into a multi-month swoon. That episode was at times characterized by wild factor rotations which played havoc across markets, sending benchmarks careening lower one day only to surge the next.
“Significant factor moves today look to be at the core of the larger Index-level selloff with my oft-warned Value over Growth imbalance dynamic again looking like ‘patient zero'”, Charlie writes, adding that “performance behavior today indicates potential rebalancing of risk exposures which in turn may be causing general portfolio distress across L/S managers in particular and likely behind some of the dynamic hedging in futures / ETFs.”
This discussion is usually couched in terms of a reversal of the years-old “slowflation” plays and McElligott’s short Monday missive is no exception. To wit:
As discussed ad nauseam here for years, the rare “Value” over “Growth” outperformance has become a standard pain-trade / de facto “Momentum” factor unwind of multi-year consensual “slow-flation” macro narrative positioning, which has worked flawlessly in conjunction with the Fed’s post-GFC efforts to flatten the US yield curve to maximize “easy” financial conditions.
The “Long Growth, Short Value” consensual positioning dynamic of the past ~ 5 years has been a critical performance driver for US Equities funds over this period, with “Long Growth, Short Value” effectively then becoming a market-neutral “Momentum” expression—which is why any catalyst for a resurgence in “Value” is a constant driver of fear for the majority of Equities players.
After going back over his 2019 steepener thesis (which he admits to having “pounded you over the head with”), Charlie notes what FinTwit has been talking about today. “Today’s behavior is most realistically related to the peak Growth factor LONG proxy (a.k.a. Value factor SHORT) that is the Software & Services space trading off ~2%”, he writes.
In any case, the bottom line for Charlie today is that with global central banks seemingly set to go back into post-crisis easing mode in order to ameliorate the global slowdown story, there’s crowding risk in the old consensus plays. To wit:
This asymmetrical positioning dynamic with investors again crowded into “Growth” and short / underweight “Value” (as many view this current global CB “dovish pivot” as meaning that we are returning to a “low rates and flat curves in perpetuity” slowing-growth world) is now receiving a lot more attention though, because PMs, CIOs and other trigger-pullers are increasingly susceptible to this crowding risk—over the last three months-worth of meetings that I have had with Equities-focused investors, the point of greatest concern / interest has again centered around my view that the a longer-term US yield curve STEEPENING in 2019 will “knock-on” into the acceleration of this “VALUE” OVER “GROWTH” reversal dynamic within US Equities
For McElligott, then, folks may be trying to get out ahead of that potential “knock-on” effect by dumping some of the Growth overweights that we all know are still heavily favored by the fundamental/discretionary crowd.
Or it could be that folks are nervous about the storm clouds gathering on the Hill.
Or it could be all of the above.
Or maybe it’s nothing.